Lara, In re

Citation731 F.2d 1455
Decision Date01 May 1984
Docket Number83-6067,Nos. 83-5748,s. 83-5748
PartiesIn re Francisco Castillo LARA and Maria Elena Lara, Debtors. Gary ZAGER and Richard Westley Pion, Plaintiffs-Appellants, v. Francisco Castillo LARA and Maria Elena Lara, Shannon Haney, Trustee, Defendants-Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

H. Steven Schiffres, Dodell & Rosoff, Los Angeles, Cal., for plaintiffs-appellants.

Cheryl White Mason, Michael J. Bazyler, Los Angeles, Cal., for defendants-appellees.

Appeal from the United States Bankruptcy Appellate Panels of the Ninth Circuit.

Before CHAMBERS and SNEED, Circuit Judges, and MARQUEZ *, District Judge.

SNEED, Circuit Judge:

The bankruptcy court held that a loan made by Gary Zager, a licensed real estate broker, and Richard Pion to Francisco and Maria Lara violates the usury prohibitions of Article XV of the California Constitution. The bankruptcy appellate panel affirmed. We affirm in part and reverse in part.

I. FACTS

Appellees Francisco and Maria Lara, husband and wife, wished to borrow money to refinance an existing loan. They sought the assistance of Mrs. Lara's brother, Henry Molinar, who in turn approached appellant Gary Zager. Zager agreed to lend money to the Laras on two conditions: first, that he could borrow half of the necessary funds from a bank; and second, that a friend, appellant Richard Pion, would agree to undertake the other half of the loan. Zager and Pion subsequently loaned the Laras $17,500 in return for a $20,000 promissory note carrying 15% interest and due in six months. The effective interest rate on the $17,500 loan for six months was 43.57%. The note was secured by trust deeds on the Laras' home and another piece of property that the Laras held for investment. The Laras were unable to repay the loan and they executed a second note for $1,000 in exchange for appellants' agreement to extend the $20,000 note for three months. The $1,000 note carried an interest rate of 21% and was also secured by a deed of trust. Three months later, the Laras were still unable to repay the amounts due.

To avoid foreclosure, the Laras filed a petition for bankruptcy under Chapter 13 of the Bankruptcy Code. Zager and Pion sought relief from the automatic stay provisions of the Code, 11 U.S.C. Sec. 362(d), and the Laras responded by claiming various affirmative defenses. Before the bankruptcy court ruled on the stay issue, the Laras sold their investment property and satisfied appellants' demands in full, subject to the bankruptcy court's resolution of the affirmative defenses.

The bankruptcy court held that Article XV of the California Constitution bars appellants from charging more than 18% interest on the loan. 1 It entered judgment

                against Zager and Pion for $20,265, which represented recovery of $7,307 interest and $12,958 for costs and attorney's fees.  Zager and Pion unsuccessfully argued that the loan is exempt from the usury prohibitions because Zager is a licensed real estate broker and California Constitutional Amendment 52, popularly known as Proposition 2, provides an exemption for loans "made or arranged by any person licensed as a real estate broker by the state of California and secured in whole or in part by liens on real property."    Cal. Const. art. XV, Sec. 1(2). 2   The bankruptcy court held this exemption inapplicable because it found that Zager did not make or arrange the loan in his capacity as a licensed broker.  The bankruptcy appellate panel (BAP) affirmed, In re Lara, 28 B.R. 16 (Bkrtcy.App. 9th Cir.1983), and Zager and Pion filed a timely notice of appeal with this court. 3
                
II.

DISCUSSION

A. Standard of Review

This case is one of first impression. It concerns the scope of usury provisions of the California Constitution. Appellees maintain that the decision of the bankruptcy court rests on findings of fact that are subject to a clearly erroneous standard of review. We disagree. The facts of this case are essentially undisputed. It turns on the scope and meaning of a California constitutional amendment and a recently enacted state statute. The bankruptcy court's conclusions of law are subject to a de novo standard of review. In re Bialac, 712 F.2d 426, 429 (9th Cir.1983). Although ordinarily a district court's interpretation of the law of the state in which it sits is entitled to some deference, see In re Mistura, Inc., 705 F.2d 1496, 1497 (9th Cir.1983), such deference is inappropriate where the applicable law changes after the decision of the lower court.

B. The Effect of California Civil Code Section 1916.1

Both the bankruptcy court and the BAP concluded that the exemption contained in Proposition 2 applies only to loans "made or arranged" by licensed real estate brokers acting in their licensed capacity. A statute enacted after the decisions of the lower courts requires us to reject this conclusion.

California Civil Code Sec. 1916.1 declares that with respect to the usury exemption for loans by licensed real estate brokers, "[t]he term 'made or arranged' includes any loan made by a person licensed as a The Legislature finds that the Legislature in adopting ACA 52 in 1979 (Res.Ch. 49, Stats.1979), and the people in approving that measure as Proposition 2 in November 1979, established an additional class exempt from interest rate limitations for persons licensed as real estate brokers by the State of California on the basis that real estate brokers are qualified by the State on the basis of education, experience, and examination, and that the licenses of real estate brokers can be revoked or suspended if real estate brokers perform acts involving dishonesty, fraud, or deceit with intent to substantially benefit themselves or others, or to substantially injure others.

                real estate broker as a principal or as an agent for others, and whether or not the person is acting within the course and scope of such license."    Cal.Civ.Code Sec. 1916.1. 4   The enacting legislation provides
                

St.1983, c. 307, Sec. 2.

Section 1916.1 applies to this case even though the statute was enacted after the decisions of the lower courts. Changes in California usury law apply retroactively to causes of action not reduced to judgment. Chapman v. Farr, 132 Cal.App.3d 1021, 183 Cal.Rptr. 606 (1982). We cannot accept the Laras' argument that this case has been reduced to judgment because the trial court entered final judgment. 5 Chapman explicitly holds that a usury law applies retroactively even if judgment has been entered and the case is pending on appeal when the law is changed. "Judgment does not become final so long as the action in which it is entered remains pending, and an action remains pending until final determination on appeal." 132 Cal.App.3d at 1025, 183 Cal.Rptr. at 608 (citations omitted).

The findings of the California Legislature expressed in Section 1916.1 necessarily guide our resolution of this case. Under California law, there is a "strong presumption in favor of the Legislature's interpretation of a provision of the [California] Constitution." Methodist Hospital v. Saylor, 5 Cal.3d 685, 692, 97 Cal.Rptr. at 5, 488 P.2d 161, 166 (1971). That interpretation is controlling if it is at least possible and not unreasonable. Id. at 693-94, 97 Cal.Rptr. 1, 6-7, 488 P.2d at 166-167. Because Section 1916.1 presents a reasonable interpretation of Proposition 2, we must accept the legislature's conclusion that a licensed real estate broker need not be acting in his licensed capacity for the usury exemption to apply. 6

C. The Usury Exemption and Equal Protection Concerns

The BAP noted equal protection concerns in holding that the exemption applies only to loans made or arranged by real estate brokers acting in their licensed capacity. 28 B.R. at 19-20. The usury exemption, the BAP concluded, would be irrational if it were extended to a real estate broker's unlicensed activities. 7 We reject this conclusion and find that the usury exemption as interpreted in Section 1916.1 satisfies the equal protection guarantees of the United States and California constitutions.

The legislature's interpretation of Proposition 2 does not violate the Equal Protection Clause of the Fourteenth Amendment. Because the classification at issue does not interfere with the exercise of a fundamental right or operate to the peculiar disadvantage of a suspect class, the proper standard for review is the rational basis test rather than strict scrutiny. E.g., Brandwein v. California Board of Osteopathic Examiners, 708 F.2d 1466, 1470 (9th Cir.1983). To challenge successfully a legislative classification under the rational basis test, a party must prove that the facts on which the legislature may have relied in shaping the classification "could not reasonably be conceived to be true by the governmental decisionmaker." Vance v. Bradley, 440 U.S. 93, 111, 99 S.Ct. 939, 949, 59 L.Ed.2d 171 (1979). A legislative classification satisfies the rational basis test if there is a conceivable legitimate purpose that would justify the distinctions made in the state's regulatory scheme. Brandwein, 708 F.2d at 1471.

The classification involved in this case easily withstands review under the rational basis test. The California legislature concluded that the usury exemption applies to licensed real estate brokers whether or not they are acting in their licensed capacity. The express justification for the expansive interpretation of Proposition 2 is the legislature's finding that real estate brokers are licensed on the basis of education, experience, and examination and that brokers' licenses can be revoked or suspended for acts involving dishonesty, fraud, or deceit. St.1983, c. 307, Sec. 2. Regardless of our view concerning the desirability of the statute, we must defer to the state government because we cannot conclude that the legislature's actions were irrational. See Vance v. Bradley, 440 U.S. at 97, 99 S.Ct. at 942.

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